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# ECON 302

## Microeconomic Theory II: Strategic Behavior ECON 302 (4)

ECON 302 covers aspects of microeconomic theory concerned with strategic behavior, imperfect information, and market failure. Topics include game theory and oligopoly; uncertainty and insurance; asymmetric information and market power, externalities and public goods, together with related issues in welfare economics. Prerequisite: ECON 201 with a minimum grade of C-; 60 units. Quantitative.

*Note: I = skill to be introduced in the course, D = skill to be further developed

#### Analyze and Interpret economic models

**Solve and interpret standard models of consumer behavior**

- Explain the concept of lotteries (I)
- Identify situations involving uncertain outcomes as choice under uncertainty and use lotteries to describe them (I)
- Use expected utility functions to describe preferences under uncertainty (I)
- Define, calculate, and explain certainly equivalent and risk premium (I)
- Define and explain the meaning of risk-averse, risk-neutral and risk-loving preferences (I)
- Explain why risk-averse individuals buy insurance, and calculate the optimal level of insurance for different premia (I)
- Draw analogy between consumer choice in product space (certainty model) and consumer choice in state space (uncertainty model) (I)
- Explain the role of preferences in consumer choices (D)

**Solve and interpret standard models of market interaction**

- Compute monopoly prices and output (I)
- Link monopoly pricing with demand elasticity (I)
- Informally explain the concept and purpose of price discrimination (I)
- Identify and differentiate price discrimination strategies (perfect, direct, indirect) (I)
- Formulate, solve and intepret the Cournot and Bertrand models of oligopoly (I)
- Explain the role of prices in the economy (D)
- Compute and interpret consumer surplus (D)
- Define oligopoly (D)
- Define monopoly and state the different sources of monopoly (D)

**Identify and analyze market failures, externalities and public goods**

- Compare market and optimal allocations under externalities, and identify policies to improve market allocations (I)
- Explain the potential role of property rights in adressing externalities (Coase theorem), and identify limitations of this approach (I)
- Identify public goods in analytic and real-world situations (I)
- Calculate equilibrium and optimal amounts of public good in a simple model with voluntary contributions and identify policies to improve market allocation (I)
- Describe and explain the free rider problem and the tragedy of the commons (I)
- State the definition of Pareto efficiency (D)
- Find Pareto efficient allocations (D)
- Identify consumption and production externalities (D)
- State the properties of public and private goods (D)

**Use game theory to analyze strategic interactions**

- Identify elements of static and dynamic games of complete information, and distinguish between these classes of games (I)
- State and apply definitions of basic game theoretic terms, such as actions and strategies, for both static and dynamic games of complete information (I)
- Find the normal-form game associated with both static and dynamic strategic interactions with a finite number of actions (I)
- Define the iterated elimination of (strictly) dominated strategies, Nash equilibrium and subgame-perfect equilibrium, and explain the motivation for these solution concepts (I)
- Solve static games and normal-form games using the iterated elimination of dominated strategies and pure-strategy Nash equilibrium (I)
- Give examples of games where a pure-strategy Nash equilibrium does not exist (I)
- Solve for mixed-strategy Nash equilibria in simple normal-form games (I)
- State the extensive-form game associated with sequential strategic interactions with a finite number of actions (I)
- Solve for subgame-perfect equilibria in games of perfect information (using backward induction) and simple finitely and infinitely repeated games (I)
- Give an example of the importance of commitment in sequential play (I)
- Explain the difference in equilibrium sets of the finitely repeated and infinitely repeated prisoner's dilemma (I)
- Define concepts of adverse selection, signaling and moral hazard (I)
- State prominent examples of adverse selection, signaling and moral hazard, and identify these phenomena in analytic and real-world situations (I)
- Solve for equilibrium prices in simple adverse selection models, and explain welfare implications (I)
- Determine the necessary cost of signaling for the existence of a separating equilibrium in a simple signaling model (I)
- Determine the necessary amount of monetary incentives to avoid moral hazard in a simple hidden action model (I)

#### Critically assess economic arguments, assumptions, and evidence

**Critically evaluate assumptions in economic/econometric models**

- Explain the role of assumptions in economic models (D)

**Compare and critically evaluate economic arguments**

- Use a model to evaluate the validity of an economic argument (D)
- Identify the key assumptions and empirical claims in an economic argument (D)

#### Use oral, written, and graphical methods to communicate economic insights

**Formulate written economic arguments evaluating or supporting a position**

- Write a brief paragraph (e.g., on an exam) that explains or applies economic concepts (D)

**Present economic arguments by means of graphs, charts and tables**

- Use graphs to illustrate the welfare effects of monopoly and externalities (I)

#### Use economic concepts to understand real-world human activity and public policy

**Apply economics to everyday situations**

- Analyze business decisions in a non-competitive environment (monopoly and oligopoly) (D)
- Formally model the decision-making of participants in a real-world situation (D)
- Describe the incentives facing participants in a real-world situation (D)

**Use economics to evaluate specific policies**

- Analyze the welfare effects of specific policies (D)

**Evaluate current events using tools of economics**

- Evaluate current events as they relate to the general course content (D)

Educational Goals ECON 302